The global pandemic has reshaped the financial industry’s landscape, presenting unprecedented challenges to traditional credit risk assessment, and demanding a reimagining of operational models. The Federal Reserve’s staggering estimate of potential pandemic-related loan losses is a stark reminder of the need for adaptive strategies that combine decision intelligence, digital operating models, and resilience. Let’s explore how these key elements are shaping financial institutions’ future, particularly in digital commerce.
Impact on Credit Risk Assessment
Conventional credit risk assessment methods that once relied on historical data were rendered obsolete as the pandemic disrupted economies and businesses. In this new era, financial institutions are transitioning from a sectoral view of creditworthiness to a more granular business model view. Evidently, companies within the same sub-sector exhibit varying degrees of resilience and survival probabilities. The incorporation of real-time business data in decision-making is proving to be a game-changer.
Decision Intelligence: Navigating the Unpredictable
Decision intelligence, the art, and science of making data-informed trade-offs in uncertain environments, has become a cornerstone of survival for banks. By embracing advanced analytics and AI, banks can review and revamp their credit-underwriting processes. This analytical prowess is bolstered by high-frequency real-time data. During the pandemic, when the traditional data was insufficient, banks relied on alternative sources —foot traffic, restaurant reservations, weekly jobless claims, and other indicators. These insights enable banks to assess risk more accurately from a broad set of parameters and adjust their lending practices dynamically. The ability of a business to descale its operations based on transaction data, such as credit-line utilization and point-of-sale transactions, empowers banks to align their resources with real-time market conditions.
Digital Operating Models: The Catalyst for Transformation
Digital operating models are at the forefront of the financial industry’s transformation. In a world where flexibility and risk awareness is paramount, these models enable financial institutions to adapt swiftly to changing demands. This adaptability not only ensures efficiency but also enhances resilience against different types of risks. According to the 6th annual political risk survey produced by WTW, 92% of all responding companies experienced a political risk loss in 2022, up from 35% in 2020. Subsequently, 68% of companies purchased political risk insurance in 2022, compared to 25% in 2019. This data once again underscores the need to redesign and reinforce operating models with decision intelligence and dynamic capabilities.
Resilience: Paving the Way Forward
Resilience has taken centre stage as financial institutions face unprecedented challenges. The ability to weather storms and pivot quickly in response to disruptions is non-negotiable. By incorporating decision intelligence and digital operating models, banks are positioning themselves to build resilience. They can anticipate shifts in credit risk, respond to changing consumer behaviours, and strengthen their overall operational foundations.
The Digital Commerce Link
Digital commerce has been a beacon of hope during these turbulent times. With physical interactions limited, businesses and consumers have turned to digital platforms. Investment in digital commerce infrastructure has allowed financial institutions to gather and analyse vast quantities of data with advanced machine-learning algorithms. This provides dual benefits – on the one hand, banks can better assess and mitigate systemic risks like credit risks, counterparty risks, and market risks with advanced analytics. On the other hand, the insights gained from the analysis also highlight new opportunities to generate additional revenue streams and offer innovative solutions. This shift also emphasizes the importance of real-time data analysis, as transaction data from digital commerce becomes a valuable tool for understanding consumer behaviour and market trends.
To summarize, the convergence of decision intelligence, digital operating models, and advanced analytics to reinforce revenue and resilience has become the foundation for navigating the complexities of the post-pandemic financial landscape. As we move forward, financial institutions embracing these elements will be better equipped to assess risks accurately, operate with agility, and thrive in the digital commerce era. By harnessing the power of data, analytics, and adaptability, the financial industry can weather the storm and emerge more robust and resilient than before.